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BYD Co Ltd (1211 HK)

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BYD’s H-shares have not recovered after plummeting 10% on media reports of Warren Buffett’s Berkshire Hathaway potentially cutting its holding on 12 Jul 22. Given the size of the holding, BYD’s H-share will come under great pressure in the short term if Berkshire decides to dispose off the shares. However, we note the transfer of shares by Berkshire may not be a prelude to its selling of BYD’s shares. It could be attributed to the prospective change in the regulation of Hong Kong that stipulates the replacement of physical shares with electronic ones. We remain positive on BYD based on the resilient outlook of its EV-related businesses, including EV, EV battery, and semiconductors.

BYD monthly production is expected to reach 300,000 units by end-22. BYD's orders on hand increased from 500,000 units on Jun 22 to 700,000 units currently and the wait list has extended to a half year. In order to fulfill strong demand, BYD is striving to expand its production capacity. The new plant in Hefei started production on 30 Jun 22, and the Changsha plant which halted production two months ago due to environmental issues has resumed production. Additionally, BYD is building new plants in Zhengzhou, Jinan, and Xiangyang. BYD has recently acquired an ICE-car plant to revamp into an EV factory. If the plan goes as expected, BYD will probably deliver 300,000 vehicles per month by end-22, which implies an annual sales volume of 3.6m units, vs its 2022 sales volume target of 1.5m units and our 2023 sales estimate of 2.25m units.

Valuation/Recommendation. BYD guided for 2Q22 net profit at between Rmb1,992m (+113% yoy/+146% QoQ) and Rmb2,792m (+198% yoy/+245% QoQ), beating expectations. We expect 2H22 earnings to increase from 1H22 based on the sustained EV sales growth. 2024 earnings are expected to more than double from this year. Current valuations imply 38x 2024 PE, which we believe is reasonable given BYD’s rapid growth rate.

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